Beware UK warns Swedish allocator Svensk Fondservice

By: Jonathan Boyd | 13 Dec 2011

Svensk Fondservice, which helps allocate SEK6bn (€661m) in long term savings, has issued a warning to its 90,000 customers over the apparent disconnect between UK macroeconomic statistics and the policy of record low interest rates coupled with ongoing quantitative easing by the Bank of England.

The UK has the world’s fourth biggest budget deficit, about 9% of GDP, which puts it together with the likes of Egypt, Greece and the US. By contrast, Italy is in 17th place out of 42 larger markets, with a deficit rate of about 4%.

Inflation is at 5%. This is the highest of all develped markets. Italy’s is 3.4% and the US’ 3.5%, Svensk Fondservice said.

On the balance of trade, the UK is ranked 16 out of 42.

And yet, despite the poor figures the 10-year government bond yield is the 11th lowest in the world, lower even than Germany’s. Compared with 42 other countries with interest rates as low as the UK’s currently, Svensk Fondservice said that the average budget deficit of these other markets is about a quarter the level of the UK’s. These other markets enjoy a healthier average balance of trade, while inflation averages 1.7%, or about a third that in the UK.

Bank of England gambles

So, why is the UK not being dragged into the same turbulence facing Italy, including the 7% government bond yields being demanded by investors? Svensk Fondservice said that Britons seem to believe that they are sailing calm waters, despite the storm clouds on the horizon.

“The Bank of England is currently pushing through so-called ‘Quantitative Easing’ and buying government bonds. That is pressing down the long term interest rate. With the statistics to hand the central bank’s actions are incomprehensible.”

“On top of this London is hosting the summer Olympic Games 2012. Most small to mid sized countries with a pending Olympic Games often exhibit the same trend: large budget deficits, high inflation and a deficit in the balance of trade. When the Games are over then growth usually collapses and panic spreads on financial markets. A warning about the UK economy and the UK pound is therefore merited.”